A Fool and His Money are Soon Parted

Posted by dfederman on May 27, 2011 in Market News | Comments Off

Outline by Dan Federman, CFP^®

“It is said that only a fool learns from his own mistakes, a wise man from the mistakes of others.” – Otto von Bismarck (1815-1898) Prussian German statesman and aristocrat.

“From the errors of others a wise man corrects his own.” -Publilius Syrus (1st Centry BC-?) Roman writer and poet.

“Experience: that most brutal of teachers. But you learn, my God do you learn.” -  C.S. Lewis quotes

“Experience is the name we give to our past mistakes” – Oscar Wilde quotes

“Good judgment comes from experience. Experience comes from bad judgment.” -     Unknown

Below are some investment and financial mistakes we’ve seen people make. Let’s be wise and learn from others’ mistakes!

1. PROCRASTINATION
   1. Save Early. Save Often.
   2. If you have Assets to Protect or Income to Replace in the event of catastrophes, get properly insured while you can.
   3. ACTING OUT OF GREED (TRYING TO GET RICH QUICK)
      1. Buying an “Investment Tip”
         1. i.      Listening to a friend, coworker, family member who tells you a stock is going to “double in six months.”
2. Buying a “Good Story” without considering risks or fundamentals
   1. i.      ex. “alternative energies” – makes sense, but businesses such as ethanol, electric cars,etc. may not be profitable for a very long time.
   2. ii.      Funds designed to double the performance of a particular market sector do not work.
3. Listening to Fortune Tellers
   1. i.      Many newsletter writers who sell subscriptions attract “sheepish” investors looking for the Promised Land.
   2. ii.      No one has a Crystal Ball
   3. iii.      Predicting the Future is Speculative
   4. iv.      Past Performance is not Indicative of Future Results
   5. v.      Ask yourself, “who is on the other side of this trade, why do you know more than they do and is this a fair price?” If there are many willing buyers and sellers, by definition, it is a fair price. (source: IFA.com)
4. Making Enormous Concentrated Bets.
   1. i.      Ex. betting big on energy stocks, Gold, Tech Stocks, Real Estate, etc.
   2. ii.      Over-concentrating in employer stocks.
5. Seeking High Yields on Cash or Other Investments
   1. i.      High yield = high risk
6. Investing in Fads.
   1. i.      Ex. Green energy, dotcoms, social media
   2. ACTING OUT OF FEAR
      1. “Catastrophisizing” – believing today’s disaster will continue indefinitely into the future.
      2. Basing investment decisions on daily headlines in the media.
         1. i.      Turn off the TV
         2. ii.      Don’t open your statements during bear markets (but check with an advisor to see if you are properly diversified in the first place)
7. Buying bear market funds or shorting stocks, attempting to capitalize from a downturn in the markets.
8. ACTING OUT OF EMOTION
   1. Buying in a state of euphoria and selling in a panic and leads to “buying high and selling low.”
   2. ATTEMPTING TO TIME THE MARKET.
      1. “Let’s wait it out until things get better”
      2. “Let’s take profits and buy on the next dip.”
      3. FAILURE TO HAVE A POSITIVE ATTITUDE ABOUT THE FUTURE.
      4. USING ASSETS TO GO INTO DEBT
         1. Buying Investments on Margin
            1. i.      Using stocks as collateral to borrow money = Bad Idea.  If the investments (or the overall market) turns south, you may be forced to sell at the worst possible time.
9. Using your home as an ATM
10. FAILURE TO MAXIMIZE RETIREMENT CONTRIBUTIONS
    1. Many people only contribute to their 401k plans at work if their employer contributes. We live in a society of shrinking pensions and social security benefits. Take full advantage of your company retirement plan.
    2. FAILING TO THINK LONG-TERM
       1. Time is your best ally when it comes to investing.
       2. If you need the money in 3 years or less, it should not be at risk in the stock market or in any “short-term trades.”
       3. FAILURE TO INVEST WITHIN THE CONTEXT OF AN ASSET ALLOCATION OR INVESTMENT POLICY STATEMENT (IPS)
          1. Compartmentalizing investments – viewing one investment at a time rather than taking a comprehensive view of your entire financial situation.
          2. Thinking “big is better” –placing investments only in “large blue chip companies” – Enron, Fannie Mae, AIG, Merrill Lynch, AIG, General Motors, etc. were all big blue chips before their stocks tanked.
          3. Investing in “dividend paying stocks” (ignoring all other asset classes available)
          4. FAILURE TO PUT YOURSELF FIRST
             1. If you have to make the choice, fund your retirement before funding your children’s college expenses. When you reach retirement age and are no longer working, you do not have the luxury of being able to save. Instead, you are taking distributions from your savings.
             2. FAILING TO PLAN FOR THE WORST CASE SCENARIO
                1. Failing to have adequate cash reserves for emergencies.
                2. Failing to set up an Estate Plan which
                   1. i.      Authorizes people to handle your affairs if you no longer can because of illness of disability (Financial and Health Care Powers of Attorney)
                   2. ii.      Specifies who gets what after you pass away (Wills, Trusts)
                   3. iii.      Provides for children who are minors or who have special needs. (Insurance, Trusts)
                   4. iv.      Minimizes estate taxes (ex. Credit Shelter Trusts, gifting strategies)
                   5. TAKING UNNECESSARY PENALTIES
                      1. Required Minimum Distributions (RMDs) – if you fail to take out the required distribution amount, the penalty is 50%!
                      2. Taking a non-qualified IRA distribution prior to age 59 ½ results in a 10% penalty and paying income taxes.

What have been some of your personal investment or financial blunders?

If you need to review your portfolio or personal financial situation, please feel free to contact us 1-800-808-7488 x101, visit us at www.aribaasset.com, or read our blog www.2020insight.com.

What Are the Tax Issues Associated With a Gain or Loss on a Primary Residence?

Posted by dfederman on May 27, 2011 in Investor Education | Comments Off

You may be able to exclude from income any gain up to $250,000 for a single taxpayer and $500,000 for a joint return. To exclude the gain, you must have owned and lived in the property as your main home for two of the five years prior to the date of the sale. If you lose money on a sale, the loss is not tax deductible.

Your Adjusted Basis

A dollar amount known as your adjusted basis determines whether you experience a gain or a loss. If you purchased or built your home, your initial cost basis typically is the cost to you at the time of purchase. If you inherit a home, the cost basis is the fair market value on the date of the decedent’s death or a later valuation selected by a representative of the estate.

The formula for determining your gain or loss is as follows:

Selling price – Selling expenses = Amount realized

Amount realized – Adjusted basis = Gain or loss

The cost basis may be adjusted over time due to the following conditions:

• Additions and other improvements that have a useful life of more than one year and that add to the value of your home. These can include a garage, decks, landscaping, a swimming pool, storm windows and doors, heating and air conditioning systems, plumbing, interior improvements and insulation. Note that repairs that keep your house in good condition but do not significantly enhance value, such as fixing gutters, repainting, or plastering, do not affect the cost basis.
• Special assessments paid for local improvements.
• Amounts spent to restore damaged property.
• Payments for granting an easement or right-or-way.
• Depreciation if the home was used for business or rental purposes.
• Others as determined by the Internal Revenue Service (See Publication 523 Selling Your Home).

The definition of a “main home,” according to the Internal Revenue Service, includes a private residence, condominium, cooperative apartment, mobile home or houseboat. It is to your advantage to maintain records of a home’s purchase price, purchase expenses, improvements, additions, and other issues that may affect the adjusted basis.

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© 2011 McGraw-Hill Financial Communications. All rights reserved.

May 2011 — This column is provided through the Financial Planning Association, the membership organization for the financial planning community, and is brought to you by Dan Federman, CFP^®, a local member of FPA.

If you need to review your portfolio or personal financial situation, please feel free to contact us 1-800-808-7488 x101, visit us at www.aribaasset.com, or read our blog www.2020insight.com.

A Fool and His Money Are Soon Parted Part 2

Posted by dfederman on May 25, 2011 in Market News | Comments Off

A Fool and His Money are Soon Parted Part I

Posted by dfederman on May 24, 2011 in Investor Education | Comments Off

Outline by Dan Federman, CFP^®

Click here for Part 2

“It is said that only a fool learns from his own mistakes, a wise man from the mistakes of others.” – Otto von Bismarck (1815-1898) Prussian German statesman and aristocrat.

“From the errors of others a wise man corrects his own.” -Publilius Syrus (1st Centry BC-?) Roman writer and poet.

“Experience: that most brutal of teachers. But you learn, my God do you learn.” -  C.S. Lewis quotes

“Experience is the name we give to our past mistakes” – Oscar Wilde quotes

“Good judgment comes from experience. Experience comes from bad judgment.” -     Unknown

Below are some investment and financial mistakes we’ve seen people make. Let’s be wise and learn from others’ mistakes!

1. PROCRASTINATION
   1. Save Early. Save Often.
   2. If you have Assets to Protect or Income to Replace in the event of catastrophes, get properly insured while you can.
2. ACTING OUT OF GREED (TRYING TO GET RICH QUICK)
    
   1. BUYING AN “INVESTMENT TIP”
      1. Listening to a friend, coworker, family member who tells you a stock is going to “double in six months.”
   2. BUYING A “GOOD STORY” WITHOUT CONSIDERING RISKS OR FUNDAMENTALS
      1. ex. “alternative energies” – makes sense, but businesses such as ethanol, electric cars,etc. may not be profitable for a very long time.
      2. Funds designed to double the performance of a particular market sector do not work.
   3. LISTENING TO FORTUNE TELLERS
      1. Many newsletter writers who sell subscriptions attract “sheepish” investors looking for the Promised Land.
      2. NO ONE HAS A CRYSTAL BALL.
      3. PREDICTING THE FUTURE IS SPECULATIVE.
      4. PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS.
      5. Ask yourself, “Who is on the other side of this trade, why do you know more than they do and is this a fair price?” If there are many willing buyers and sellers, by definition, it is a fair price. (source: IFA.com)
   4. MAKING ENORMOUS CONCENTRATED BETS.
      1. Ex. Betting big on energy stocks, Gold, tech stocks, real estate,etc.
      2. Over-concentrating in employer stock.
   5. SEEKING HIGH YIELDS ON CASH OR OTHER INVESTMENTS
       
      1. high yield = high risk
   6. INVESTING IN FADS
      1. Ex. Green energy, dotcoms, social media
3. ACTING OUT OF FEAR
   1. Catastrophisizing – believing today’s disaster will continue indefinitely into the future.
   2. Basing investment decisions on daily headlines in the media.
      1. Turn off the TV
      2. Don’t open your statements during bear markets (but check with an advisor to see if you are properly diversified in the first place)
   3. Buying bear market funds or shorting stocks, attempting to capitalize from a downturn in the markets.
4. ACTING OUT OF EMOTION
   1. Buying in a state of euphoria and selling in a panic and leads to “buying high and selling low.”
5. ATEMPTING TO TIME THE MARKET
   1. “Let’s wait it out until things get better”
   2. “Let’s take profits and buy on the next dip.”
   3. MARKETS MOVE FAST. MISSING THE 10 BEST DAYS EACH YEAR CAN SIGNIFICANTLY DIMINISH INVESTMENT RETURNS
6. FAILURE TO HAVE A POSITIVE ATTITUDE ABOUT THE FUTURE

If you need to review your portfolio or personal financial situation, please feel free to contact us 1-800-808-7488 x101, visit us at www.aribaasset.com, or read our blog www.2020insight.com.

Is Long-Term Care Insurance a Good Idea?

Posted by dfederman on May 19, 2011 in Investor Education | Comments Off

There is a good possibility that you or your spouse will eventually require some form of long-term care. According to the U.S. Department of Health and Human Services, about 40% of people aged 65 or older will enter a nursing home for some period of time during their lifetimes.¹

Whether you or your spouse will be among this group is impossible to predict. But it is wise to consider how you might pay for long-term care and whether long-term care insurance is a good idea for you.

Cost of Care

Perhaps the first consideration is determining the potential cost of long-term care. Below is a summary of current costs according to the U.S. Department of Health and Human Services National Clearinghouse for Long-Term Care.

Average costs in the United States (in 2009):¹

• $198/day for a semi-private room in a nursing home
• $219/day for a private room in a nursing home
• $3,131/month for care in an assisted living facility (for a one-bedroom unit)
• $21/hour for a home health aide
• $19/hour for homemaker services
• $67/day for care in an adult day health care center

With health care costs rising every year, these expenses can be expected to grow substantially over time. Furthermore, neither Medicare nor Medicare supplemental coverage, also known as Medigap insurance, typically cover long-term care. Medicaid will cover a large share of such services but only if you meet stringent financial and functional criteria. What’s more, most employer-sponsored or private health insurance plans follow the same general rules as Medicare. Therefore, most people who need long-term care must pay for some or all of it on their own.

Cost of Insurance

Like life insurance, long-term care insurance policy premiums largely depend on your age and health. If you take out a policy when you are young, you can expect to pay comparatively low premiums during the life of the plan, while starting a new policy when you are older will entail significantly higher monthly premiums. A 65-year-old in good health can expect to pay between $2,000 and $3,000 a year for a policy that covers nursing home care and home care, with premiums adjusted for inflation.²

Most long-term care policies sold today are federally tax-qualified, which means the premiums paid and out-of-pocket expenses for long-term care may be applied to the medical expense deduction of the federal tax code. (Typically, taxpayers may deduct the portion of medical and dental expenses that exceed 7.5% of adjusted gross income.) Additionally, long-term care benefits received are not taxed as income up to certain limits. Consult with a tax advisor to learn more about the tax implications of long-term care insurance.

Coverage

Long-term care policies are complex and vary widely. But in general, long-term care insurance typically covers the following:

• Nursing home care
• Adult day care
• Visiting nurses
• Assisted living
• In-home assistance with daily activities

LTC includes a range of nursing, social, and rehabilitative services for people who need ongoing assistance due to a chronic illness or disability. LTC insurance can be used by anyone at any age who suffers an accident or debilitating illness, but it most frequently is used by older adults who need assistance with essential physical needs, such as bathing, dressing, or eating.

Other Considerations

Deciding whether to purchase long-term care insurance will depend on your personal situation. You may want to consider your family health history, your level of assets to potentially pay for long-term care, and your feelings about relying on family members for support. Probing these and other individual circumstance can help you make a well-informed decision.

¹ U.S. Department of Health and Human Services, National Clearinghouse for Long-Term Care, 2009 (latest available).

² AARP.org

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© 2011 McGraw-Hill Financial Communications. All rights reserved.

May 2011 — This column is provided through the Financial Planning Association, the membership organization for the financial planning community, and is brought to you by Dan Federman, CFP^®, a local member of FPA.

If you need to review your portfolio or personal financial situation, please feel free to contact us 1-800-808-7488 x101, visit us at www.aribaasset.com, or read our blog www.2020insight.com.